Last week I ran a piece looking at how good the AAII sentiment survey is as a contrarian indicator. In the post I pointed out that a problem with sentiment surveys is that we are conditioned to try to be bearish when other people are bullish, and therefore there is a circular reference error built into most sentiment surveys (i.e. if everyone is bearish because everyone is bullish, is everyone bearish or bullish).
In an attempt to strip some of this noise from the data, below is the AAII data presented as one year rolling averages. I thought that maybe this would give a less biased view of structural changes in sentiment that might be more informative about long term trends. The rolling averages suggest that the recent bull market hasn’t turned bears into bulls as much as it has turned bears into “neutrals.”
For comparison, a chart of the weekly AAII data can be found here.
Below is a comparison of oil and gas reserves for a handful of mid-sized exploration and production companies along with the enterprise value per Barrel of Oil Equivalent (BoE) that the market is currently placing on the reserves.
$CHK, $APA and $DVN trade at the low end of the range of value assigned to a barrel of oil in the ground. Meanwhile $COG and $SWN trade at the high end, despite heavy concentrations of natural gas reserves. Given that they trade at premiums, $EOG and $APC are slightly more gassy than I would’ve expected with 64% and 54% of their reserves in natural gas, respectively. Note that $OXY is a little skewed by its downstream operations.
Values as of most recent 10-k filing
As the Dow inches closer to a new all time high, the S&P 500 is still about 1% away from a new high of its own. Part of the reason for the divergence is that the Dow has outperformed the S&P 500 by that amount year to date. However, the Dow did underperform the S&P 500 by almost 6% last year and actually has a history of underperforming the S&P 500.
Below is a chart of the historical performance of the $DJIA and the $SPX going back to 1957, the year that the S&P 500 was created. Since then the S&P 500 has outperformed the Dow by 452%, although each index has given investors solid returns. The S&P 500 is up 3390% while the Dow is up 2937%, which means that an investor that put $100k into each index in 1957 would have $3.39m vs. $2.93m. The largest performance spread between the two indices happened in the early ‘oughts when at one point the S&P 500 had outperformed the Dow by 1000%
Currency markets have been relatively active recently with the Yen depreciating by almost 20% versus the dollar amid talks of global currency wars. Below is a check in on how the USD has fared against a selection of emerging markets currencies over the last year. In general the dollar has strengthened relative to most.
Facebook is down 2% today as the market is up by a little over 1% (continuing its lack of correlation), but the stock has recovered nicely from its 2012 doldrums as the lockup-expiration boogeyman proved more bark than bite. Still, the stock has retreated from its highs and one could argue that $FB’s recent run was propelled by short covering. Now $FB’s short interest is at its lowest level since it IPO’d. Going forward, the company will have to prove whether it can deliver earnings, and the stock has to prove that it can rise without short covering.
After today’s 127 point gain, the Dow has been up, down and then up again by more than 100 points for three days in a row. Below is a chart of the other times that the Dow has had alternating triple digit moves (either down, up, down or up, down, up) since 1999. In case we have a 100 point down day tomorrow, I also highlighted the times that the Dow has displayed this behavior for four days in a row (either up, down, up, down or down, up, down, up).
The reason I did this analysis is that my hypothesis was that these large swings were indicative of market indecision and possibly high levels of stress that could be signals of market turning points. Eyeballing the data below doesn’t seem to disprove the hypothesis. The three day swings may be slightly less conclusive; however, the four day swings, which are less frequent, tend to cluster around important market crossroads including the March 09 low, the October 07 top and the 02/03 bottom. One observation that may be significant is that these type of swings hardly happened at all in the 03-07 bull market, but have occurred frequently in the most recent period. Perhaps this is evidence that the whole bull run has been characterized by higher than typical skittishness and volatility.
The FDIC released its Quarterly Bank report today and it showed that US Banks had their 2nd most profitable year ever last year. It was the most profitable since before the financial crisis. In 2009, 2010 and even 2011 there were many who argued that the banking system would never reach its former level of profitability. While returns on capital are still low because leverage has come down, return on assets is near old levels and last year’s nominal profit number should provide some indication that banks are recovering nicely.
I spent a fair amount of time last year tracking how similar this bull market has been to the 2003-2007 bull market (first: here). So far 2013 has gotten off to a much faster start than 2007 (just like 2012 started off a little faster than 2006 did). However, today’s sell off could be a signal that the correlation remains intact. In the last cycle, the first sign of recession came on February 27, 2007, when the Dow sold off by 416 points, the largest decline at the time since 2001. On that day the VIX spiked from 11 to 18, similar to today’s jump from 14 to 19. If this proves a proper historical reference point, below is a road map of how things could unfold from here.
In 2007 the initial spike in the VIX proved somewhat short lived. The February spike was actually caused by fears about China’s growth (note there’s not a word about subprime in that CNN article), and the S&P 500 rallied from March through July. Subprime fears didn’t truly start to take hold until summer of 2007 when Bear Stearns’ hedge funds blew up. Importantly, the S&P 500 made new highs in October of that year and NBER lists that the recession began in 4Q07. Even though the February and Summer VIX spikes were the early precursors to recession, they were largely dismissed by bulls for almost a year before the market topped.
$XLV made another new all time high this morning, and is now almost 15% higher than the highest level it reached in 2007. Being a “defensive” sector, generally one might expect healthcare to be under-performing the $SPX in a bull market; however since mid 2011 $XLV has notched steady out-performance versus the S&P 500.
Below is a longer term chart going back to 1999 which shows $XLV’s relative performance in different market phases. The most recent period doesn’t exactly fit with the pattern. This, along with the out performance of consumer staples companies, may reveal some underlying fragility in market sentiment.
One of the reasons that the financial crisis got as bad as it did was because of the amount of leverage employed by Wall Street as the economy went into a recession. The market decline was exacerbated if not caused by the mass deleveraging of the financial sector over the course of several of months. For instance, Goldman Sachs went from $1.1 T in assets in 2007 to $880 B at the end of 2008. Since it raised capital at the same time, the leverage ratio fell from a high of 26x to a low of 11.8x in 2010.
As securities markets have recovered investment bank balance sheets are growing again, although, using $GS as a proxy, leverage is still much better than it was in 2007. If recession is on the visible horizon, perhaps this will help to soften any market decline.